Time for Obama to show leadership on taxes

Commentary: House Republicans won’t break their promise

WASHINGTON (MarketWatch) — Plus ça change, plus c’est la même chose, as they say in France. Or, the more things change, the more they stay the same. The day after the election, with billions of dollars and countless hours spent on the 2012 campaign, America is left with the same president and similar majorities in both chambers of Congress, a Democratic-controlled Senate and a Republican-controlled House.

Republican House candidates ran on a platform of lower taxes and less government spending. That platform appears to have been compelling for most American voters. House Speaker John Boehner, who lost only a few seats despite President Barack Obama’s victory, said yesterday that “there is no mandate for a tax increase.”

But the day after the election, in the twisted logic of Washington, some in the Democratic Party suggest that the Republican House must acquiesce to Obama’s every demand. In particular, members who ran on a platform of lower taxes must agree to higher taxes.

The House would not pass Obama’s proposed tax increases over the past four years, and is unlikely to pass them now. As America considers the fiscal cliff, tax reform, and the debt ceiling, a solution has to be able to pass the House, and the Republicans still hold a similar number of seats.

Of course, with the end of the Bush tax cuts, all taxes will rise on Jan. 1, if the president and Congress do nothing — just as they were scheduled to rise on Jan. 1, 2011.

Individual tax rates will rise from 10% to 15% for the lowest income earners, and from 35% to about 42% on the highest earners. (The 42% rate includes the new 0.9% Medicare tax increase on earned income, as well as the phase-out of itemized and personal deductions).

Tax rates on capital will rise from a 15% rate on long-term capital gains and dividends to a 20% rate on capital gains and to approximately 44% rate on dividends (including the new Medicare surtax on unearned income).

This tax-rate increases will reduce growth even further, below its 2% rate. After the 2010 election Obama said that now is not the time to raise tax rates because the economy was weak. Now gross domestic product growth, at 2% in the third quarter of 2012, is lower than it was in 2010, when it was growing at 2.4%.

Reuters

House Speaker John Boehner says no to tax increases.

The nonpartisan Congressional Budget Office wrote in August that going off the fiscal cliff, namely the proposed combination of tax increases and spending cuts that is due to take place under current law, will lead to a recession: “Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5% between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9% in the second half of calendar year 2013.”

Alternatively, revenue can be raised from tax reform with lower tax rates, accompanied by entitlement reforms and spending cuts. (The House budgets of the past two years assumed a modest increase in revenue via tax reform.) The question is whether Obama will continue to swat this potential solution away in favor of a tax increase that cannot pass the House, or engage Congress for enactment of a solution that can pass both chambers.

Republicans have consistently offered the president a solution: extend the Bush tax cuts. But the president has refused. Instead, he is holding all Americans hostage by allowing tax rates to rise in 2013. The president says that if Congress does not agree to higher taxes on small businesses and high-income Americans, he will allow taxes to rise on all Americans, including middle-income Americans.

The president masquerades as a protector of the middle class. But he is willing to allow their tax rates to rise, potentially sending the economy into a recession, to score political points.

Of course, now that the presidential election is over, and the exigencies of a political campaign are behind him, the president may show leadership and unite all Americans behind a plan to keep tax rates low. This would spur economic growth and lower unemployment.

By compromising on the budget and agreeing to higher taxes, House Republicans will not only betray the voters who just re-elected them to office, but also risk sending the economy into a recession.

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